Once A Sail, Now an Anchor: Medicare Incentive Programs are Making Safety-Net Hospitals Unaffordable

Here is an interesting exercise and an unfortunate lesson in the law of unexpected consequences:

Pop Quiz: Your elderly Granny comes from overseas without insurance and suddenly needs her gallbladder taken out. You call around the hospitals in town and they agree to extend to you the same rates as they would charge Medicare. (This is hypothetical, of course. They would treat Granny and stick you with the rack rate….. but bear with me.)

Would you expect to get the best deal at:

The prestigious university affiliated teaching hospital

A nice community hospital in a fancy part of town

A large safety-net hospital downtown

The for-profit community hospital that admits a lot of Medicaid patients in a tough part of town?

The answer is (2) and by a long shot. I’ve looked at recent Medicare base rate data for a big city and found that you’d pay 10.2% more to go to the urban community hospital and a stunning 15% more to go to the large safety-net hospital downtown. In contrast, you’d only pay 4.6% more than the community hospital to go to the fancy academic medical center.

How’d that happen?
It’s an important question with implications beyond the hypothetical Granny case.

Some background: over the years, the federal government has built a number of financial incentives into the Medicare payment model to encourage certain socially important objectives.

Medicare wants hospitals to care for the poor and to teach medical residents, so they have built-in special payment provisions to the Medicare payment algorithms. The incentive to care for the poor is called the disproportionate share hospital (DSH) program.

The DSH program pays hospitals who care for a large number of Medicaid (or Supplemental Security eligible) patients a premium to their base rates. The DSH details are here in a nice primer.

The goal of the program is to create an incentive for hospitals to care for socially complex patients which often cost more than their diagnoses might suggest.

Now, this all works well when the federal government is paying hospitals directly. Since the government set up the incentive as a social good, it doesn’t mind paying more. But, when Medicare migrates to risk-based payments, things begin to fall apart. I’m referring to Medicare Advantage, and here’s the problem:

Medicare Advantage (MA) is an alternative way of paying for senior care. Under MA, insurance companies petition the government to receive a federal premium and then sell Medicare insurance policies to seniors. It has proven to be popular. According to the Kaiser Family Foundation, since the enactment of the ACA, Medicare Advantage enrollment has increased by 5.6 million, or 50 percent.

Medicare Advantage programs transfer risk from the federal government to the insurance companies (and often to downstream risk-bearing provider groups). It is designed to force the risk-bearors (insurance companies or providers) to be careful about costs and to generate value.

Insurance companies negotiate the MA rates with the hospitals directly. In practice, the MA rates are within spitting distance of traditional Medicare rates, at least for inpatient stays. As with all negotiated rates, the numbers are opaque: But Robert Berenson and colleagues have thrown some light in their wonderful recent Health Affairs article: turns out that hospitals usually end up negotiating around 100-105% of Medicare base rates.

The issue is that these base rates include, of course, DSH and other incentives making academic safety-net hospitals particularly unattractive to risk-bearing groups looking for someplace to care for their elderly patients.

So, here we have another example of the bizarre world of risk, where every incentive generates a paradoxical and opposite response. As Medicare Advantage and risk-assumption grow in popularity, programs like DSH (and the resident teaching funds, IME) aren’t simply sources of revenue: Their boost to base rates seems more like an anchor that prices vulnerable hospitals out of an increasingly cost-conscious market.

* MA appears to be a loss-leader for hospitals that negotiate commercial and MA deals on the same renewal cycle. They potentially make up MA losses on the commercial side of the negotiation. Austin Frakt in his Incidental Economist blog has some fascinating takes on this study.

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“Managing capitation can be deceiving. Like flying an airliner, the gauges, levers and controls can make it seem like high-stakes science. It is, partly. But as with all things healthcare this is ultimately about humans, their needs and their behaviors. You eventually learn that managing the payment model is as much an art as is the actual practice of medicine”.